HOMEfires - Vol. 3 No. 8, June 2001

Q: What changes have been made to the methodology for calculating Section 8 income limits?

What impact will these changes have on the calculation of HOME income limits?

A: The HOME income limits are calculated using the same methodology that HUD uses for calculating the income limits for the Section 8 program, in accordance with Section 3(b)(2) of the U.S. Housing Act of 1937, as amended. These limits are based on HUD estimates of median family income, with adjustments based on family size. The Department's methodology for calculating nationwide median family income figures is described in Notice PDR-2001-01. Income limits are calculated for metropolitan areas and non-metropolitan counties in the United States and its territories using the Fair Market Rent (FMR) area definitions used in the Section 8 program. The very low-income limits have the most detailed statutory requirements, and therefore have been used as the basis for deriving the other income limits. "Very low-income" is defined as 50% of the median family income for the area, subject to specified adjustments for areas with unusually high or low incomes. The low-income limits for a 4-person household are calculated as 1.6 (i.e., 80%/50%) times the relevant 4-person very low-income limit.

Beginning in FY 2001 the Department is employing a new procedure for calculating very low-income limits for its programs. This change is tied to a corresponding change in the calculation of Fair Market Rents (FMRs). The methodology for calculating HUD's 2001 income limits makes use of a new procedure to identify areas with "unusually high incomes," which is one of the exceptions to the calculation of very low-income limits provided in the statute. Under the new procedure, the 4-person very low-income limit will not be reduced to below 50% of median unless this amount exceeds the greater of either: 80% of the U.S. median family income; or, the income needed to afford a unit renting at 100% of the FMR if 30% of income is spent on housing.

The original very low-income cap was established when FMRs were set at the 50th percentile. Very-low income limits were capped at the amount it would cost a 4-person family spending 30% of its monthly income to rent a 2-bedroom unit at 120% of the FMR. The decrease to the 45th and then to the 40th percentile had the unintentional effect of significantly increasing the number of areas where income limits were reduced.

The HOME income limits are established for low-income families, very low-income families, and families at 60% of median income by family size. The net effect of the change in HUD's methodology is to increase the HOME income limits in approximately 900 counties that previously had income limits set at less than 50% of median family income. These now have higher income limits based on their local median family income, and these changes also produce higher 60%t and 80% of median income limits. This change will allow a greater number of families to qualify as very low-income, which in turn will increase the number of affordable housing options that they are eligible to apply for. This includes HOME, as well as Section 8 and Low Income Housing Tax Credit (LIHTC) projects.